Clifford May - OPEC conspiracy drives up oil costs

Published: March 11, 2013 10:41AM

If you suffer a heart attack but your doctor thinks you've got a nasty case of indigestion, chances are the medicine he prescribes won't cure you. The same applies to policymaking and legislating: Misunderstand the problem, and you're likely to come up with a useless -- or damaging -- response.

Anne Korin and Gal Luft, co-directors of the Institute for the Analysis of Global Security (IAGS), have long argued that liberals, conservatives and libertarians have all misdiagnosed why the West has become dependent on oil, why the price of oil keeps rising no matter how much we drill, conserve and boost miles per gallon, why dependence on increasingly expensive oil is a dire threat and what can be done to restore the health of our national and economic security. In Petropoly: The Collapse of America's Energy Security Paradigm, they make a muscular case for a Teddy Roosevelt-style solution: trust-busting.

Korin and Luft are not attempting to pick technological winners and losers. On the contrary, they recognize that think-tank researchers, Energy Department bureaucrats and politicians are ill-equipped to make such calls. President Jimmy Carter's Synthetic Fuels Corp., President George W. Bush's "hydrogen economy," President Barack Obama's Solyndra scandal and years of bipartisan ethanol subsidies should have taught us to reject "taxpayer-funded boondoggles." Their alternative is to seek guidance from the works of free-market economists such as Milton Friedman, who argued that "the first and most urgent necessity in the area of government policy is the elimination of those measures which directly support monopoly."

Oil is a strategic commodity -- a shorthand way of saying that America and other industrialized nations would collapse without it. Our enemies know this as well as we do -- better, actually.

The Organization of Petroleum Exporting Countries (OPEC) cartel controls 78 percent of the world's conventional oil reserves, yet it accounts for only about 33 percent of global oil production. The explanation: By conspiring to restrict production, OPEC manipulates prices.

"Price-fixing by private companies on the OPEC scale would not be tolerated in any industrial country," observes M.A. Adelman, a Massachusetts Institute of Technology professor emeritus of economics. "In the United States, the officers of firms that engage in such activities go to jail. But the OPEC members are sovereign states, subject to no country's laws."

We can't drill enough to have an impact on prices -- OPEC can simply drill less to offset our production and keep prices where it wants them. Similarly, we can build more fuel-efficient cars, drive them less and raise taxes on gasoline. It still won't help because OPEC can adjust their faucets and the price to its liking and our detriment.

How to break the oil monopoly and encourage the emergence of a free market in transportation fuels? Korin and Luft are convinced all that is required is moving from single-fuel automobiles to vehicles that are capable of running on a variety of liquid fuels. The additional cost is about $100 a car -- less than the cost of an airbag.

Korin and Luft note that in Brazil, motorists today buy cars capable of running on gasoline, ethanol (made from sugar cane) and, increasingly, natural gas. Meanwhile, in Shanxi, China, "the city's buses, taxis and many private vehicles run on methanol" -- a fuel that is both cleaner and cheaper per mile than gasoline.

Again, Korin and Luft are not arguing for these or other fuels. They are arguing for the opening of the market. More fuel, more diverse fuel sources and more consumer choice, they believe, will lower and stabilize prices while reducing the political power of foreign oil producers.

To what should be no one's surprise, the creation of a free market in fuels is opposed by OPEC and others who benefit from the status quo. They are spending lavishly to undermine potential competitors, not least through an elaborate disinformation campaign. To take but one example: The United Arab Emirates recently funded a feature film starring Matt Damon raising alarums about the environmental risks of fracking.

Korin and Luft conclude that those members of Congress who had no difficulty voting to mandate digital television and rear-end cameras for cars but are opposing measures to allow fuel competition are "aiding and abetting OPEC" and standing between "the perpetuation of a restrictive monopolistic and economically ruinous fuel system and a free and competitive fuel market which could provide us true and lasting energy security."

If Americans understood that was what their representatives were doing, I doubt they'd let them get away with it for long.

(Clifford May is president of the Foundation for the Defense of Democracies, a policy institute focusing on national defense.)